Output floor

On December 7, 2017, the Basel Committee on Banking Supervision published its final rules for revising the calculation of risk-weighted assets (RWA), marking a significant development in banking regulations. Initially scheduled for a year earlier, these revisions were delayed due to contentious discussions about introducing a capital floor. The agreement to implement a new capital floor, aimed at profoundly impacting banks' capital requirements, was a critical consensus among committee members. However, finalising its design and calibration was challenging, reflecting the diverse opinions on the role and reliability of internal models versus a more aggregated approach in determining capital requirements.

TREA = max {U - TREA; 72,5% ∙ S - TREA}

U-TREA captures the total risk exposure amount calculated using both standardized and internal models approaches, for which the bank has regulatory approval, while S-TREA represents the total risk exposure amount calculated solely using the standardized approaches.

The output floor requires banks to concurrently calculate both standardised approaches and internal models, adjusting capital ratios and integrating additional capital requirements into their capital allocation and pricing strategies. This uniform capital floor, adopted internationally and within the EU, aims to modernise the Basel I requirements, harmonise national implementation disparities, and address variability in risk weights caused by diverse interpretations of internal model rules. From a regulatory perspective, these measures are intended to improve the comparability and consistency of capital requirements among banks and over time.